Friday, August 17, 2012

Brent-WTI spread blows out again

As discussed back in June, the projections of Brent and WTI crude oil convergence did not materialize. Goldman's prediction that we will see $5 spread between the two crude oil markets by the end of this year was wrong. The expectations that the Seaway pipeline will deliver sufficient amounts of US crude to the Gulf to force convergence just didn't materialize. The spread touched $20 a couple of days ago.

Brent-WTI closing prices (Bloomberg)

Bloomberg: - Lost crude production from the North
Sea to Iran has driven the disparity between the world’s two
most-traded oil grades to the widest in more than nine months,
threatening to undermine Goldman Sachs Group Inc.’s forecast
that they will become more aligned.

North Sea Brent remained at least $20 a barrel more
expensive than West Texas Intermediate in the five days through
yesterday after the gap almost doubled since June 20, according
to data compiled by Bloomberg. Goldman Sachs has predicted since
April that the spread will drop to $5 a barrel in three months.

The growing difference underscores how falling output from
the North Sea’s aging oilfields and U.S.-led sanctions on
Iranian crude sales are stoking Brent while a production boom
that’s deepening a glut of landlocked U.S. supplies limits WTI’s
gains. BNP Paribas SA, Citigroup Inc. and Commerzbank AG say the
spread is unlikely to narrow any time soon.

At least a portion of this spread increase is driven by escalating rhetoric coming out of Israel. And it is no longer just speculation or media hype. It seems that Israel's officials are seriously considering a military strike (also discussed here).

JPost: - Setting Iran’s nuclear plans back a few years to buy time for regime change or other unforeseen developments would be good in its own right, even if Israel cannot completely take out Iran’s nuclear program, Prime Minister Binyamin Netanyahu said recently, The Jerusalem Post has learned.

Netanyahu, in private meetings, repeated a number of times that before Israel’s 1981 attack on Iraq’s Osirak nuclear reactor, the Mossad and Military Intelligence were opposed because they thought the best that could be done was to delay the program for a couple of years.

With the heightened geopolitical risk, Brent is now viewed as having a great deal of the upside, while WTI, impacted by strong domestic production in the US, has the downside. This divergence is keeping the spread elevated.

Bloomberg: - “The Brent oil price is biased to the upside while the
other is to the downside,” said Eugen Weinberg , head of
commodities research at Commerzbank in Frankfurt. “On the WTI side, there are still high inventories, very high domestic
production, high imports and anemic demand. On the other hand,
maintenance work in the North Sea and latent geopolitical risks
are pushing Brent higher.”